Providing Creative Solutions For Automotive Dealers

Is Your Pre-Owned Vehicles Investments?

One of the questions we usually hear from Dealers that has just recently enrolled with Credit Acceptance is “what type of vehicle will work with your program?” I am sure at one time in our history this was a legitimate question. Let’s face it our core business is the credit challenge consumer that in most cases has limited income and resources. It makes sense that this consumer would need a reliable form of transportation with reasonable payments. This translates to a limited selection of vehicles that can fit this profile.

Just a few years ago our average contract terms were just 24 to 36 months. Now it is not uncommon to see contracts coming into our office at 48, 54, and even 60 months, allowing us to place more consumers in the right new or used vehicle that fits their needs. Our 40 plus years of managing risk allows us to provide options other lenders can not. So the question “what type of vehicle will work with your program?” results in a completely different answer. In fact the answer depends on one’s local market and what mind set one might have in managing inventory.

To a retail dealer, inventory is their investment. To move that investment the consumer must be willing to pay the requested retail price by either paying cash or financing it. So what is the right type of vehicle that will result in more sales and higher profits? The answer is quite simple, buy low and sale high. Find what your market considers “hot”. But it is really that simple? With the wide selection of sedans, SUVs, trucks, makes, and models, how can we determine what is moving fast and what is just “cold”? How much should a retailer pay for any given vehicle? These concerns lead retailers to take higher risks or make speculative purchases in hopes that their instincts are correct when selecting vehicles that might fit the needs of the local market.

Maybe this is why I am a huge fan of vAuto and the company’s vision in how to increase the turn rate of pre-owned vehicles as well as the overall profitability. I believe this concept or idea takes the pressure out of finding “the right” vehicle at the right price. This company’s philosophy is to manage used vehicles as “time-sensitive investments”, with the goal to maximize the R.O.I. within the shortest period of time with the least amount of risk. So if the retailer makes a bad selection, they have ways of getting rid of that mistake in a short period of time. On the other hand should the retailer hit upon a desired vehicle, they can hold out for a higher market price and still move that vehicle within a desire time frame. This philosophy is known as an ‘investment-driven retailing strategy’.

Most retail dealers are not accustomed to this concept and usually when looking for vehicles will fall back on several time honor practices which is to find any vehicle that can be had at a cheap price or if obtaining a ‘choice vehicle’ that is somewhat higher price, will hold on to that “choice vehicle” until a premium retail price can be obtained. The investment driven retailer is not driven by these ideas but instead will use the same investment concepts used in the financial markets to select inventory and determine how to price.

The investment driven strategy is focused around the principal of maximizing the money invested in any individual vehicle for a greater overall R.O.I. with the least amount of risk. This strategy consists of developing a series of revenue objectives as well as buy / sell guide lines. Once each vehicle is viewed as an income producing investment, emotions and speculative hunches are taken out of the decision-making process resulting in a more manageable game plan.

Consider one example, a retailer purchases a vehicle for a slightly higher than average Black Book value of $5000.00 and is willing to sell the vehicle for $7000.00 to realize a gross profit of $2000.00. This same retailer’s inventory has an average age of 90 days. Based on these numbers, this retailer would average $2000.00 every 90 days on this $5000.00 (of course an average). For comparison sake we will take out any possibility of not selling this vehicle in 90 days or cutting the price to move the vehicle.

The investment driven strategy would suggest that this retailer move this vehicle as quickly as possible (within 30 to 40 days) and be willing to take a short profit or almost any “blue sky” to move the unit. Let’s play this out a bit more or dig deeper by assuming the retailer only makes $900.00 in gross profit compare to the desire $2000.00 on the $5000.00 within 30 days. $900.00 x 3 (a 30 day turn in 90 days) comes to $2700.00 compare to moving the same $5000.00 every 90 days making $2000.00 once every 3 months. This will result in $700.00 more in gross profit in a 90 day time period. The retailer is also putting more consumers in the street to spread the good word, their inventory does not become ‘”aged”, and mistakes are quickly taken care of.

Now you add the very strong possibility that if any given vehicle is still on the lot after 90 days the retailer is willing to take a smaller profit or might even consider moving this “cold car” by wholesaling the vehicle, with this in mind, this strategy becomes even more attractive. In other words instead of buying cheap and selling high, the focus is to buy within reason and sale at the moment any blue sky is realized.

In this example not only will the retailer make $2800.00 more in any given year on the $5000.00, the overall risk has been reduced by moving all vehicles in a shorter period of time reducing the chance of getting stuck with a “cold car”.

This strategy has never been about finding vehicles at a cheap price or below Black Book Wholesale to just move a unit within 30 days. It is about an invested minded retailer understanding the market conditions on any given vehicle while making the logical choice in pricing his / her vehicles base on current market conditions. At the same time, it allows for the ability to hit more “home runs” because the retailer gets more opportunities at bat to select a greater number of vehicles on the same $5000.00. Now consider this, if this is your return on just one vehicle or money set aside for that vehicle; consider how strong this can be if you carry more than 15 vehicles on your lot at any given time.

I have to take a moment to say thanks to Dale Pollack, the founder of vAuto for the idea of this strategy as well as his thoughts and many articles covering this concept over the years. You will find many ideas in this blog are based on Dale’s teachings. For more information on the investment driven strategy concept visit www.vauto.com or visit Dale’s blog.